Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
Oct. 9 — LVNV Funding has once again been accused of violating federal consumer protection law by trying to collect on time-barred debts and has again sought refuge in the Bankruptcy Code.
Potential conflicts between the Bankruptcy Code and the Fair Debt Collection Practices Act (FDCPA) have been a hot topic for courts recently, and it's an issue that could potentially reach the Supreme Court.
In this case, Judge Beth Bloom found that there is an irreconcilable conflict between the FDCPA and the Bankruptcy Code and that creditors must be allowed to file stale claims in bankruptcy without running afoul of the FDCPA.
LVNV filed a claim in the bankruptcy of debtor Ernest Lewis, despite the fact that the statute of limitations under Florida law had expired. Lewis objected to the claim and the bankruptcy judge disallowed it.
Lewis then sued LVNV for violating the FDCPA, asserting the LVNV's claim in the bankruptcy was “unfair,” “unconscionable,” “deceptive,” and “misleading.” Enacted in 1977, the FDCPA was intended to discourage the use of deceptive debt collection practices. LVNV is defending similar suits in at least one other court.
To support his argument, Lewis cited another in which LVNV was a defendant, the Eleventh Circuit's 2014 decision in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014). In Crawford, the court found that attempting to collect on a stale debt by filing a claim in bankruptcy could constitute an FDCPA violation, but the Eleventh Circuit expressly refused to decide whether there is any conflict between the FDCPA and the Bankruptcy Code because LVNV didn't advance that argument. LVNV tried to appeal to the Supreme Court, but the high court refused to take the case.
The court in this case answered the question the Eleventh Circuit wouldn't touch and found that the FDCPA and the Bankruptcy Code are in conflict when it comes to filing stale claims. The definition of a “claim” in bankruptcy is “broad in scope, seemingly encompassing those claims which may be precluded by relevant legal or equitable doctrines and pertinent statutes.” The court also noted that, under Florida law, “a statute of limitations bars a remedy, not a right.”
“This principle lends credence to the fact that a lapsed limitations period merely forecloses the creditor's remedy or, in other words, ability to recover the debt,” the court said. “An expired statute of limitations does not, however, negate a creditor's purported ‘right' to payment.” The court concluded that a creditor has the right to file a claim under the Bankruptcy Code even if that claim later proves to be unenforceable.
The court said this creates an “irreconcilable” and “unambiguous” conflict with the FDCPA, which would punish creditors for trying to exercise their rights under the Bankruptcy Code and collect on such debts.
“In essence, [the creditor] is presented with a choice: either file the proof of claim which may be rendered void by operation of an applicable statute of limitation and risk liability under outside consumer finance statutory regimes or, in the alternative, forfeit any potential recovery of the debt,” the court said. “This clearly yields an irreconcilable conflict or an otherwise unambiguous antagonism and tension between the statutes.”
The court therefore held that the FDCPA must yield to the Bankruptcy Code. Another Florida district court made a similar ruling in July. The court acknowledged that another case addressing this issue is pending before the Eleventh Circuit, but refused to hold off on its ruling until that case is decided.
The issue of conflict between the FDCPA and the Bankruptcy Code has produced inconsistent results in courts across the country. The Second Circuit has held unequivocally that “the filing a proof of claim in bankruptcy court cannot form the basis for an FDCPA claim.” The Ninth Circuit has similarly held that a debtor's FDCPA claim was precluded by the Bankruptcy Code when a creditor tried to collect on a debt in violation of the debtor's discharge injunction.
In contrast, the Seventh Circuit found no irreconcilable conflict between the FDCPA and the Bankruptcy Code and found that FDCPA claims premised on violations of the automatic stay and discharge injunctions could proceed. A 2013 case from the Third Circuit considered all of these circuit court cases and ultimately sided with the Seventh Circuit, holding that when “FDCPA claims arise from communications a debt collector sends a bankruptcy debtor in a pending bankruptcy proceeding, and the communications are alleged to violate the Bankruptcy Code or Rules, there is no categorical preclusion of the FDCPA claims,” according to research conducted by Bloomberg BNA.
The debtor was represented by Seth Wieder of Loan Lawyers LLC, Fort Lauderdale, Fla.
LVNV was represented by Ella Aliza Shenhav of Shutts and Bowen, Tampa, Fla.
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